Recent Changes in Arizona Foreclosure Law

Certain Lenders Must Explore Foreclosure Options with Borrowers

The Arizona Legislature enacted HB 2626 (codified at A.R.S. § 33‑807.01), which adds a new section to the Arizona trustee's sale statutes.  The new section imposes an additional obligation on certain lenders that must be satisfied before a trustee's sale can be commenced.  HB 2626 goes into effect on July 29, 2010.

In short, unless a specific exception listed in HB 2626 applies, the new law applies to properties with a first deed of trust recorded on or after January 1, 2003 through December 31, 2008 if the borrower occupies the property as the borrower's principal residence.  If no exception exists, the lender must attempt to contact the borrower at least 30 days before any notice of trustee's sale may be recorded to explore options to avoid foreclosure.  The attempted contact must be documented in writing and that documentation must be maintained in the credit file.  HB 2626 does not require the lender to agree to any specific option regarding the loan workout, and § 33‑807.01(D) specifically provides that nothing in the new law requires a servicer to provide a loan modification.

HB 2626 creates several unanswered questions.  For example, although this was probably not an intended result, a lender who loaned a borrower money secured by a property used as an apartment complex could be required to follow the procedures of this new law if the borrower under the loan is an individual and if that individual resides in one of the apartments as the borrower's principal residence.  After July 29, if the borrower is an individual and if the property can be used for residential purposes, the lender must now conduct due diligence to determine whether the borrower occupies the property as the borrower's principal residence before the lender can safely commence a trustee's sale.  

HB 2626 refers to the "lender" in some portions of the new law and to the "beneficiary" in another section without explaining the distinction, if any, that was intended by that usage  The trustee's sale statute contains a definition of "beneficiary" but not of "lender".  "Beneficiary" means the person named or otherwise designated in a trust deed as the person for whose benefit a trust deed is given, or the person's successor in interest.  A.R.S. § 33‑801(1).  Typically, the beneficiary identified in the deed of trust, or its successor, is the lender, but not always (such as in the case of the MERS loans).   

The procedures mandated by HB 2626 do not apply to certain types of loans described in the new law; however, there is no specific exception that applies to loans that are purchased or serviced by Freddie Mac or Fannie Mae and/or that are subsequently sold by those entities.  Further investigation is needed to determine whether a federal pre-emption statute may apply.  

Federal Residential Tenant Protections Expanded by New Arizona Law

On May 20, 2009, President Obama signed into law Senate Bill 896, also known as the "Helping Families Save Their Homes Act of 2009."  Section 702 of that Act, the "Protecting Tenants at Foreclosure Act" (the "Federal Law") was considered a watershed change in the law providing protections to residential tenants rarely seen in residential leases, albeit common in commercial leases.  The key provisions of the Federal Law provided that "bona fide" residential tenants must receive a 90-day notice to vacate from the person receiving title at the foreclosure, and in certain circumstances, the tenant had the right to remain in the premises for the term of the lease.  The Arizona Legislature has recently expanded those tenant protections by passing House Bill 2766 (codified at A.R.S. § 33‑1331), which takes effect on July 29, 2010 (the "Arizona Law"). 

The Arizona Law provides that if a rental agreement is entered into after the foreclosure action is initiated, the owner shall include written notice of possible foreclosure with the rental agreement with the tenant.  The Arizona law contains a suggested form of the required notice.  The Arizona Law does not apply to multifamily residential rental units consisting of four or more connected units (typically apartment units).  Rather, the purpose of the Arizona Law is to provide information to renters in homes that are subject to foreclosure and to work in conjunction with the provisions of the Federal Law. 

If the owner fails to provide the proper notice, the tenant may deliver notice to the landlord seeking to terminate the lease if the breach is not cured within 10 days, and seek to recover damages up to twice the amount wrongfully withheld by the owner and/or obtain injunctive relief.  If the tenant elects to terminate the lease, the owner must return the tenant's security deposit. 

Whether Arizona Law will provide any real protection to a tenant is questionable.  If the rental unit is sold at a foreclosure, the tenant stands to lose (i) any deposits it paid to the prior owner that were not held in trust by the foreclosing lender, (ii) any prepaid rent, (iii) the tenant's moving costs, and (iv) the difference, if any, between the cost to rent the premises and the cost to rent a replacement rental unit.  Most residential tenant leases are short term, either six months or a year.  Most residential leases do not require security deposits in excess of one and one-half months' rent (45 days).  By the time the foreclosure of the property is completed, the remaining term on a residential lease may be less than the protection period provided by the Federal Law, thereby reducing or eliminating the damages the tenant may suffer.  Moreover, to recover any actual damages (such as lost deposits) from the defaulting owner would prove difficult if not impossible given that the owner may have little additional assets beyond the property that is being foreclosed.  Few tenants will have the financial means to file lawsuits to collect from the defaulting owner especially when the amount at issue may not be substantial. 

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The information in this posting is for educational and information purposes only. Transmission of the information is not intended to create, and receipt does not constitute, a lawyer-client relationship. The writer is not acting as your attorney, and makes no claims, promises or guarantees about the accuracy, completeness, or adequacy of the information contained in or linked to this blog. The law changes very rapidly and, accordingly, the writer does not guarantee that any information in this blog or the writer's affiliated web sites will be accurate or up to date on the date that you read it. The law differs from jurisdiction to jurisdiction, and is subject to interpretation by judges who have their own opinions of the law, particularly as it relates to specific facts. Legal advice must be tailored to the specific circumstances of each case and the information in this blog may not be an appropriate fit in your situation. Nothing that you read or is provided on this blog should be used as a substitute for the advice of your own legal counsel who has examined your own factual situation.